For those who thought this day might never come, it might be an anti-climax but Minister for Finance, Michael Noonan is reported to have said on his trip to the US that steps will now be taken to impose haircuts on senior bondholders in Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS). Information from the Central Bank of Ireland in March 2011 suggested that Anglo had €3bn of senior guaranteed bondholders and also €3bn of senior unguaranteed unsecured bondholders, though some €200m of that was repaid in May 2011 without any haircut whatsoever. INBS has approximately €600m of senior unguaranteed unsecured bondholders remaining. Anglo has so far received €29.3bn of citizens’ funds whilst INBS has received €5.4bn. Billions of euros have already been repaid across both institutions.
Reporting from RTE suggests that at this stage Minister Noonan is targeting the €3.5bn of senior unsecured unguaranteed bonds in Anglo and INBS. RTE also say that “he would be going to Ireland’s European partners to propose significant cuts in the money to be paid to the bondholders”
It is not clear at this stage if the Minister is proposing a unilateral burning of senior bondholders or if any burning will be, as is the case now, contingent on permission from the ECB. It is also not clear why there has been a change of stance. Has the ECB moved? Will the ECB change the arrangements for its non-standard liquidity programme which presently sees some €80bn of funds costing just over 1% in Irish banks? Many questions remain unanswered. This post will be updated later when more details emerge.
Of course, as was reported here last week, it is likely that INBS will need additional capital on top of the €5.4bn already injected, and Anglo may be in a similar position – remember the Central Bank of Ireland (CBI) two weeks ago just confirmed that loans loss estimates remained in line with previous estimates; as the analysis of INBS’s year end accounts showed, there were additional losses to loan losses. Anglo may find itself in a similar position. The CBI is declining to respond to the question of whether new capital is needed for INBS.
The last question is whether moves are afoot to burn senior bondholders at Irish Life and Permanent, AIB and Bank of Ireland. CBI governor Patrick Honohan referred to “current policy discussions” in respect of protecting senior bondholders in his Vincent Browne interview last Friday. Are we about to stoke up the fires?
UPDATE: 15th June, 2011. It seems that the sole source for the above is an RTE one-on-one interview with Minister Noonan in Washington where he is presently visiting the IMF and US Treasury Secretary Timothy Geithner. The interview was played on RTE Six One News and will be available online for free play-on-demand here shortly. Having seen the interview, I don’t think it merits the headline billing being given it by RTE. Minister Noonan is to present the ECB and EU with a plan to allow a degree of haircut on Anglo and INBS senior unguaranteed bondholders. The Minister seemed to me to be pursuing an angle of Anglo and INBS no longer being banks and that consequently their debts to bondholders should be treated differently. From this perspective, it is difficult to see the ECB reacting positively to the plan but RTE certainly seems to think it has legs.
UPDATE (1): 16th June, 2011. It seems that Minister Noonan’s one-on-one interview with RTE was not a solo run, as Tanaiste (deputy prime minister) Gilmore has provided more background to Ireland’s position, He is reported by RTE to have said “The Irish economy is in an entirely different situation than the economies of some of the other countries whose budgets are in trouble. Therefore we are in a much stronger position today than we were at the beginning of this Government and certainly than we were in November to negotiate with the European Central Bank” It is hard to see how, taken in isolation, Ireland is in a better economic position now compared with last November, though the bank stress tests have overall been well-received which might give some confidence as to the funding required there. The Irish Times today reports what is likely to be the Irish line in any new request to the ECB “I put my cards face up on the table, saying: ‘Look, it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks […] we don’t think the Irish taxpayer should have to redeem what has become speculative investment” and “the officials “understood our position fully” and said “they would work with us to seek to resolve it […] our difficulty on this and on previous occasions was never with the IMF. The difficulty is what attitude the European Central Bank may take.”
UPDATE (2): 16th June, 2011. We are still in the dark as to whether the Noonan “plan” has any prospect of being approved by the ECB, but it is clear that there is a degree of co-ordination now in evidence in the grish Government side. In the Dail this morning, the Tanaiste said that the Government would consider new legislation to impose haircuts on senior bondholders and not just at Anglo/INBS, but that any such legislation would be subject to approval from the ECB. There has not been any reaction from the ECB yet, nor specifically from the EU though RTE quote a spokesperson for Olli Rehn as saying it was “always ready to consider any proposal in the context of completing the restructuring of the Irish banking system” It seems curious that almost 24 hours after the yesterday’s statements by Minister Noonan in Washington, that the ECB has not given a reaction, very curious as the 17 governor members and the six board members are usually happy to give their (unco-ordinated) opinion.
UPDATE (3): 16th June, 2011. The transcript of the one-on-one interview with Minister Noonan is now available from RTE.
UPDATE (4): 16th June, 2011. Ransquawk is reporting that Minister Noonan will not “touch” bondholders in AIB or Bank of Ireland, and that “every red cent” will be repaid to senior bondholders in those two banks.
UPDATE (5): 16th June, 2011. Minister Noonan’s interview on Bloomberg TV in the US today is now available here. During the interview he asserted in very strong terms (an “absolute commitment”) that “every last red cent” will be repaid to senior bondholders in Allied Irish Banks (AIB) and Bank of Ireland – he didn’t specifically mention Irish Life and Permanent. Minister Noonan claimed that it was the plan all along to discuss senior bondholders at Anglo and INBS in the Autumn 2011 but that recent events had brought that forward. Apart from the banks, Minister Noonan spoke about Greece and said his primary concern for Greece was on the domestic political side but that he expected the next tranche would be paid in July 2011. There was a bit of spin when Minister Noonan claimed we had the strongest government ever in Ireland – it’s a coalition today whereas we have had majority governments 30 years ago. He indicated a decision on Greece on 11th July which appears to be on the brink of Greece’s obligation to repay maturing debt on 15th July.
UPDATE: 17th June, 2011. The Irish Times seems to have secured the first (and possibly the last) ECB reaction to Minister Noonan’s mooted “plan” for Anglo and INBS senior bondholders – “The general stance of the ECB is known and is very unlikely to change. This particular issue has to be looked at when the time comes” said an unidentified source, but it has the ring of solemn truth about it.Now that the smoke is clearing from the bombshell in the US, it seems that Minister Noonan will not be broaching the subject with the ECB until “the Autumn”. I don’t think there will be any more forthcoming from the ECB at this stage so to summaise and wrap up this episode: two days ago Ireland’s finance minister said he had plans to impose losses on senior bondholders at Anglo and INBS (he didn’t mention AIB or Bank of Ireland at the time), yesterday he made it absolutely clear that there would be no losses at AIB and Bank of Ireland and said this was a plan which he had intended broaching with the ECB in the Autumn anyway but that the circumstances in Greece had brought the timing forward and today we get what’s likely to be the most expansive ECB response to the “plan” which is “get lost”, and also Minister Noonan won’t now raise the “plan” until the Autumn. At home, Fianna Fail public expenditure spokesman Michael McGrath criticised the announcements by Minister Noonan claiming they were motivated more by political concerns surrounding the first 100 days in office of the new Government. It’s hard not to place some credence in what Deputy McGrath says.
NAMA Wine Lake 
I would like to share your optimism but I can’t see this actually happening, it sounds more like government playing politics in public as last option to see whether public pressure could force the hand of EU or ECB to alter their position.
I suspect that the government hope they might be given permission from ECB to engage in a voluntary buyback and so they will attempt through the airwaves to drive the price down with some threatening language and buyback the bonds at market price and make some savings and win some political kudos.
Alternatively, Noonan knows full well that the ECB will agree to nothing and he is doing this as purely a political excercise bringing a debate which was private into the public sphere. It has been known since November from Colm McCarthy and other informed sources that the IMF were in favour of haircuts on seniors. While Morgan Kelly talked about Geithner’s opposition, this has not been established and furthermore Geithner’s supposed opposition related to all unsecured unguaranteed senior debt and therefore the €2 billion or so of senior in Anglo even if the story were true is unlikely to cause the same amount of concern.
Therefore unless ECB pull an almighty u-turn from external pressure or otherwise I suspect that November 2nd will remain a big pay day despite any noise that we will likely here from politicians before that.
Late in coming but still very welcome.
@D_E, I don’t think we should be too excited
(1) It won’t be the full €3.5bn which is itself a fraction of the total bonds including guaranteed.
(2) At present, it is no more than a plan which needs be approved by the ECB and I can’t see how its position will have changed in the past few months – remember the Government also had a “plan” to secure an interest rate reduction and a “plan” to achieve fiscal equilibrium without raising income tax – there have been quite a few “plans” which have been shelved
@NWL
Possibly maybe even probably true, but I am going to try to at least try give this government a chance before saying they have failed on everything. They may do but I’m going to give them the benefit of the doubt for the moment.
The optimum point for imposing losses on bank bondholders has long since passed and we have probably already passed the point where soveriegn default is all but inevitable. However, we should still do everything possible to make that outcome less likely.
As the old saying goes ‘Look after the pence and the pounds will look after themselves’ :)
So even if is only €1.5bn it is still €1.5bn less sovereign debt.
do snr bonds not rank equally with ecb deposits which would also legally need a haircut should seniors be burnt? can’t see that happening. getting the impression that noonan isn’t up to the job.
Why aren’t we using the bailout money to buyback the bonds at a discount on the secondary market? IT reports Anglo bonds trading at 70c in the euro today.
The fact that we even COULD buy back our own banks’ bonds on the secondary market, with haircut and using the ECB borrowed money, when the ECB won’t allow us impose that haircut up front – is that not crazy? What’s the moral difference between that and developers buying back their own properties at reduced prices from NAMA?
This is financial folly, all of it; burn the bloody bondholders now, all of them, let them take their pain, and with the kind of people we have in this country, the current young generation especially, we’d bounce back in double-quick time.
Start to current (which, with €64bn of bonds falling due over the next few years, isn’t yet near ‘finish’), this has been a fiasco, a nonsense, a mind-bending failure of proper governance on an unprecedented scale.
@ Diarmuid
In order to do something as radical as that we have to balance the books overnight (15 billion in cuts and taxes) and alienate many of our European ‘partners’. Its a very high risk strategy. Cant see two conservative government parities trying it. Not that i think its a bad idea.
@Eamonn, not that the issue of burning bondholders is not complicated, but we have in place an agreement with the IMF and EU which on the IMF/EU side commits these parties to fund our deficit until 2014 and on our side we have a Memorandum of Agreement which commits us to various actions (fiscal and bank) but does not commit us to saving snr bondholders. I think this is what puzzles and upsets many people, there is no agreement (attached to consideration and the like, as you would get in a contract) to protect bondholders in bust private institutions. There is an agreement to get our deficit reduced and effectively eliminated and in return for that agreement on our side, on the other side there is a commitment to provide funding at 5.8% (which delivers a profit to our funders) for the next three years.
NWL
I wonder what was in the confidential side letter accompanying the MOU.
My solution as per recent letter in the SBP:
“Any offer of a minor reduction in the interest rate should be rejected out of hand. Instead, the Government should demand a reduction in the bailout interest to a nominal rate (say, 1%), a payment reschedule spread over decades and an immediate write down of outstanding bank bonds by about 50%. In return, it must adhere to the bailout terms and agree for purely political reasons to a temporary levy of, say, 3% on top of the sacred corporate tax rate.”
I wonder also how much would have been saved if the Government had acted much earlier to burn bondholders in the banks having first put in place a resolution scheme and moved all deposits etc. to newly constituted “good” banks.
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@jct
“do snr bonds not rank equally with ecb deposits which would also legally need a haircut should seniors be burnt? can’t see that happening. getting the impression that noonan isn’t up to the job.”
that’s what i thought until i discovered that NRPF’s preferred shares in Bank of Ireland, which rank BELOW the same bank’s subdebt, will not be touched while the subdebt is 80%+ exterminated.
capital hierarchies mean nothing in Ireland.
It seems that we need ECB approval to burn the seniors. Why? I don’t think it’s a condition of the EU-IMF bailout deal as incorrectly suggested by FG’s Paschal Whatshisname on VB tonight. Perhaps it’s the fact that the ECB is funding the banks so heavily at 1% and the fear that such funding may be pulled or the terms including interest rate altered?
Michael
@Michael, so are you saying that the ECB position was : protect the bondholders or we withdraw or impede the non-liquidity funding assistance? You might well be right but shouldn’t we have full disclosure of the ECB’s stated position, no some vague reference to “influence” from a central bank governor, arguably ambushed during what was supposed to be a memoriam. Threats work both ways, Ireland could threaten to veto the second Greek bailout, but the European Union is supposed to be a community based on solidarity and not parochial positioning.
So what was the “influence” that the ECB exerted last November 2010 and what is in the side letter to the Memorandum of Understanding?
A depressingly foreseeable response from the ECB. As long as we are spending more than we are taking in taxes we must tow the line. Our priority should be to close the deficit.
Question though. Over the last number of days it seems to be clear that even though EU banks have the greatest exposure to the EU debt crises, the US has the greatest CDS exposure. Why do the Europeans care so much about default if the US has insured it? Default, let the Americans pick up the tab and lets get on with it? What am I missing here?
Anglo deposits and accompanying assets were shifted to AIB in February, thus protecting them from sharing in losses. Senior bondholders would surely fight an attempt at cutting them but not depositors on the basis that the Bank had practised fraudulent preference, making depositors whole when they knew they were insolvent.
I guess seniors will settle for some cut but it won’t be 90%.
Headline on the papers today: No tax rises or welfare cuts. Why are they promising the undeliverable?
NWL,
I don’t have the answers but the side letter worries me too. I guess the ECB’s thinking is understandable if they fear that by burning Anglo and INBS seniors that will discourage investors from making future loans to AIB and BOI and that leaves those banks unable to repay the Eur150bn or so of liquidity provided to those banks by the ECB.
@Michael, that might be right but I don’t think AIB and BoI will be issuing bonds for some time to come. The ECB will be repaid by deleveraging some €70bn as planned by 2013 and by Irish banks regaining the trust of depositors. In any event the ECB has committed to keep its non-standard liquidity arrangements until October 2011, though the likelihood is that they will be extended. However to threaten to withdraw the arrangements which would plunge the Irish economy into chaos would be the nuclear threat, like Ireland withdrawing from the euro or vetoing the second Greek bailout.
[…] details here – was originally issued on 25th January 2007 and despite Minister Noonan’s bold announcements in the US last summer, it is set to be repaid in full; this is largest single payment remaining of the €3bn […]
[…] 15th June 2011 – Minister Noonan is in the US and causes worldwide drama when he announces intentions to seek the burning of bondholders at Anglo and INBS. In an extensive interview in Washington with RTE’s Richard Downes, the minister doesn’t mention “promissory notes” once. […]